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It could come as a dreaded envelope in your mailbox, or as a call from an unknown number you’re afraid to take. Whether you’re receiving calls or mail from a debt collector or are going out of your way to avoid either (or both!), you’ll probably want to know: What is a debt collection agency, and how does it work?

How Do Collection Agencies Work?

At their most basic, debt collection agencies exist in order to try to get borrowers to pay their overdue debts. Debt collection companies make money by buying debt from lenders, often for pennies on the dollar, and then attempting to get the original amount owed from the borrower.

A bill that’s 30 days past due is otherwise known as a delinquent account. Lenders and creditors have some leeway when they report overdue debts to credit bureaus. For borrowers who continually miss payments, a lender may report a missed payment right at the 30-day mark. But for a borrower who has a positive repayment record, a lender might allow a few missed payments before reporting it to the credit bureaus.

A debt is typically not sent to a collection agency until several months have gone by and your lender no longer wants to put effort into collecting the debt from you. Instead, the lender might either enlist an agency that is hired to collect third-party debts or sell the debt to a collection agency. Once the debt has been sold to a debt collection agency, you may start to get calls and/or letters from that agency.

You may be wondering what a collection agency can do to you. The debt collection industry is heavily regulated, and borrowers have many rights when it comes to dealing with bill collectors. Debt collectors are allowed to try to get you to pay, but they are restricted by the Fair Debt Collection Practices Act (FDCPA), which prohibits them from harassing you or lying to you in order to collect your debt. Despite this, debt collectors will try everything in their power to get you to pay your old debt.


💡 Quick Tip: With average interest rates lower than credit cards, a personal loan for credit card debt can substantially decrease your monthly bills.

What Is a Debt Collector?

A debt collector can be either an individual person or an agency. In either case, their task is to collect overdue debts from those who owe them. Sometimes referred to as collection specialists, an individual debt collector may be responsible for many accounts. They may be paid a base salary plus commission, so they have a high incentive to convince the debtor to pay.

What Do Collection Agencies Do?

Debt collection agencies are hired by creditors and are generally paid a percentage of the amount of the debt they recover for the creditor. The percentage a collection agency charges is typically based on the age of the debt and the amount of the debt. Older debts or higher debts may take more time to collect, so a collection agency might charge a higher percentage for collecting those.

Some agencies may also charge a flat fee for collecting a debt. Others work on a contingency basis and only charge the creditor if they are successful in collecting on the debt.

The debt collection agency enters into an agreement with the creditor to collect a percentage of the debt — the percentage is stipulated by the creditor. One creditor might not be willing to settle for less than the full amount owed, while another might accept a settlement for 50% of the debt.

When the debt is collected, the agency takes its payment from the amount paid and sends the remainder to the creditor.

Recommended: What Are the Common Uses for Personal Loans?

How is this different from a debt buyer?

The main difference between a debt collector and a debt buyer is the stage the debt is with the creditor. If a creditor is still trying to collect a debt, either on its own or through a debt collection agency, the debt is considered to be a current debt. But if a creditor has given up trying to collect a debt, they may write off — or charge off — the debt, no longer expecting it to be paid.

A debt collector is hired by the creditor to attempt to collect what is owed on the current debt by the debtor.

A debt buyer, in comparison, doesn’t work for the creditor like a debt collector does. They buy debts that have been charged off by creditors, sometimes buying a collection of old debts from a single creditor. They may pay very little for the debt, sometimes just a few cents of what was originally owed. Debt buyers then attempt to collect the debt, sometimes using aggressive tactics.

The debt buyer buys only an electronic file of information, often without supporting evidence of the debt. The debt is also generally very old debt, sometimes referred to as “zombie debt” because the debt buyer tries to revive a debt that was beyond the statute of limitations for collections.

How to Deal With a Debt in Collections

Debt collection agencies may contact you either in writing or by phone.

If your first instinct is to hang up when you get a phone call from a debt collector, you’re not alone. But not talking to them won’t make the debt go away, and they may just try alternative methods to contact you, including suing you. When a debt collector calls you, it’s important to get some initial information from them, such as:

•  The debt collector’s name, address, and phone number.

•  The total amount of the debt they claim you owe, including any fees and interest charges that may have accrued.

•  The date the debt was incurred and who it was originally owed to.

•  Proof they have that the debt is actually yours.

The debt collector must let you know that you have the right to dispute the debt and how to do so. If they don’t say this in their first contact with you, they must notify you of your right to dispute within five days of their initial contact with you. Under the FDCPA, a debt collector must send a debt validation notice, which must include certain information.

•  The letter must state that it’s from a debt collector.

•  Name and address of both the debt collector and the debtor.

•  The creditor or creditors to whom the debt is owed.

•  An itemization of the debt, including fees and interest.

They must also inform you of your rights in the debt collection process, and how you can dispute the debt.

•  If you don’t dispute the debt within 30 days of their first contact with you, they’ll assume the debt is valid.

•  If you do dispute the debt within 30 days, they must cease collection efforts until they provide you with proof that the debt is yours.

•  They must provide you with the name and address of the original creditor if you request that information within 30 days.

The debt validation notice must include a form that can be used to contact them if you wish to dispute the debt.

The FDCPA ensures that consumers aren’t harassed during the collections process. Some things debt collectors cannot do are:

•  Make repeated calls to a debtor, intending to annoy the debtor.

•  Threaten physical violence.

•  Use obscenity.

•  Lie about how much you owe or pretend to call from an official government office.

How Does a Debt in Collections Affect Your Credit?

Generally, unpaid debt is reported to the credit bureaus when it’s 30 days past due. If payments continue to be missed, additional late payments will be reported, and with each missed payment, your credit is likely to be negatively affected.

If your debt is transferred to a debt collector or sold to a debt buyer, an entry will be made on your credit report. Each time your debt is sold, if it continues to go unpaid, another entry will be added to your credit report.

Each negative entry on your credit report can remain there for up to seven years, even after the debt has been paid. This, of course, will likely affect your credit score. Higher credit scores may take a greater hit than lower credit scores.

A late payment or collections entry on your credit report could lower your credit score by as much as 110 points, a debt settlement entry could lower it by as much as 125 points, and a bankruptcy could lower it up to 240 points.

Recommended: How to Check Your Credit Score for Free

Alternatives to Debt Collection Agencies

You have options when it comes to dealing with your debt. Here are a few you may want to consider.

Credit Consumer Counseling Services

With credit consumer counseling services, you may be paired with a trained credit counselor who works with you to develop a debt management plan. Generally, counselors don’t negotiate a reduction in debts owed, but they could help lower monthly payments by working to increase the loan terms or lower interest rates. A plan may require you to make a single monthly payment to the agency, which then makes monthly payments to all of your creditors.

The credit counselor can also provide guidance on your money and debts, work with you to create a budget, and even offer free workshops or financial literacy materials.

Many agencies are nonprofit and offer counseling services for free or at a low cost. To find a nonprofit agency that’s certified by the Justice Department, you may want to start with this list.

Debt Settlement

Debt settlement is where a third-party company negotiates with your creditors or debt collectors on your behalf to try to reduce your debt.

Paying off less debt might sound like an easy win, but debt settlement can come with some big financial risks, possibly affecting the debtor’s credit score and ability to access credit in the future, and costing more along the way. Plus, creditors are under no obligation to accept a settlement proposal, and not all creditors will negotiate with a debt relief company.

Instead of paying a company to negotiate on your behalf, you can try talking directly to your creditors for free. While creditors may not reduce your debt, they may be open to negotiating for a lower rate or offering a modified payment plan so your payments are more manageable.

Debt Consolidation

If you have multiple, high-interest debts, you may choose to consolidate them into a new, single personal loan. Ideally, this new loan has a lower interest rate or more favorable terms to help streamline the repayment process.
Personal loans are often unsecured, which means no collateral is required to secure the loan. They can have fixed or variable interest rates, but it’s usually easy to find a lender that offers fixed-rate personal loans.

Note that some loans come with origination fees, which can add to the total balance you’ll have to repay. You may also be charged with late fees, prepayment penalties, or other fees. Make sure you understand any fees or penalties before you sign the loan agreement.


💡 Quick Tip: Before choosing a personal loan, ask about the lender’s fees: origination, prepayment, late fees, etc. SoFi personal loans come with no-fee options, and no surprises.

The Takeaway

If you’ve received a phone call or letter from a debt collector, it helps to understand how debt collection agencies work and how to deal with a debt in collections. Avoiding a collector won’t make your debt disappear — it’s better to get all the information you can from the debt collector to help you make informed choices as you go through the collections process or dispute the debt. And if you’re having trouble managing multiple high-interest debts, remember there are options available to help get control of your finances.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.

SoFi’s Personal Loan was named NerdWallet’s 2024 winner for Best Personal Loan overall.

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SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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Psychological pricing tactics are strategies that trigger emotions among consumers and can encourage them to shop and spend more.

For example, perhaps you’ve seen deals where prices are marked down to figures that end in .99 cents rather than a whole number. Or you’ve seen items at the supermarket that say you should compare the price to a different size package to see how much you’re saving.

The psychological impact of these maneuvers can lead you to think you are getting a great deal and head to the cashier. But you may not really be snagging a bargain and could wind up paying more than you need to.
Ready to boost your knowledge about these practices? Here, you’ll learn:

•   What is psychological pricing?

•   What does psychological pricing encourage you to spend more?

•   How can you avoid overspending due to psychological pricing?

What Is Psychological Pricing?

Psychological pricing is a sales strategy that focuses on how pricing can impact you, the shopper, emotionally and psychologically. As different prices will have different effects, these tactics can influence your spending and saving habits and get you to dole out more money. By understanding and dodging these moves, you may be able to quit spending money so freely.

How Does Psychological Pricing Work?

One of the main reasons why psychological pricing is so effective is that consumers rarely know how much something should cost. Instead, they lean on cues, context, and the prices of similar items to clue them in on whether something is a bargain.

These tactics can fool your brain and often offer the illusion of a deal. Unless you are an expert in supply chain finance or are a human supercomputer who can assess the total costs and lifecycle of a product, it’s hard to gauge how much something should cost.

Marketers may count on that and use it to their advantage, tempting you to make an impulse buy, even when the price is perhaps not as appealing as it may seem.

15 Examples of Psychological Pricing Tricks

Here, you can learn some of the most common tactics that can be used to encourage consumers to overspend.

1. Charm Pricing

Ever wonder why the price of that shampoo is $4.99 and not $5.00? Enter charm pricing. This technique operates using the “left-digit” bias. This means that the digit that’s leftmost in a price will impact the consumer’s perceptions the most. In other words, the number that’s to the farthest left will “charm” you into thinking the price is lower than it actually is.

In turn, a retailer will use the numbers “5” and “9” instead of rounding up the price. For example: $495 versus $500 may make you believe the price is closer to $400 than $500. Another example: $8.99 versus $9 can make you think the price is closer to $8 and not $9. You might wind up overspending and feeling as if you are bad with money afterward.

2. Odd-Even Pricing

This kind of pricing, which favors using odd numbers, is along the same lines as charm pricing. The reasoning behind odd-even pricing is odd and even numbers affect one’s perception of the value of an item.

Interestingly, prices that end with odd numbers make the price of something seem less expensive. On the flip side, prices that end with an even number or that are rounded up to a whole number seem more expensive.

3. Decoy Pricing

With this pricing tactic, you’re led to a particular choice by being offered inferior options or ones that seem “not good enough” or “too pricey.” You can think of this as Goldilocks pricing, where the middle option seems the best deal or choice.

For example, you’re shopping online for dog biscuits for your furbaby Bailey. In doing a bit of comparison shopping, you find similar boxes of pumpkin doggie biscuits; in fact, there are three different options. The least-expensive option doesn’t seem like you’re getting the best quality or the most bang for your buck, and the most-expensive option seems like you’re going overboard. So you go for the mid-priced choice. If you hadn’t been offered those three options, you might have bought the lowest-price item and been perfectly satisfied. Now, you’ve wound up overspending.

4. Buying in Bulk

Warehouse membership clubs and discount retailers are filled to the brim with buying in bulk deals. For instance, “Buy 2, Get 1 Free” or “10 for $15.” Sure, you might be saving some dollars off of the manufacturer’s suggested price, but at the end of the day, you are spending more than if you just bought a single item.

Are you really saving on a $2.50 tube of toothpaste if you spent $40 and bought more than you need? Will you really be able to eat through that 24-pack of yogurts before they reach their expiration date?

5. Price Appearance

The design or look of prices can make a difference in how it’s perceived. For instance, prices that are in a smaller-sized font and don’t have the zeroes tacked onto the end may appear less expensive. For instance, “$40” can seem cheaper than “$40.00.” Longer prices can strike us as more expensive. Why’s that? Simply because it takes longer to read them.

6. Removing a Comma

Similar to the price appearance tactic, removing a comma from a higher-priced item can make the cost seem lower than if you included that little bit of punctuation. That’s because including a comma makes the price take longer to read. If you make something phonetically shorter (i.e., it takes less time for the brain to read and process), it may trick the brain to think the price is lower.

Recommended: 5 Ways to Achieve Financial Security

7. Fake Time Constraints

These limited time offers are set up by the retailer to create a sense of urgency — all so you act quickly and part with your money. For example, you may see an offer that says, “50% off for this weekend only!” These constructed time constraints can have you moving quickly, at times impulsively, and get you to spend more.

8. Emphasis on Emotion or Nostalgia

By tapping into the allure and pull of nostalgia — an item that reminds you of your childhood or is associated with happy memories from the past — retailers can get you to part with your money. Because you long to relive those fond, happy times, you might not worry as much as the cost of something.

Similarly, tapping into a strong emotion, such as joy, family, adventure, and general warm — happy vibes, either through packaging, marketing, or brand messaging, can urge you to spend money.

9. Innumeracy

This psychological pricing tactic draws on what you might call “being bad with numbers.” Many consumers don’t have a grasp on basic mathematical principles to figure out what is a better deal when shopping. For instance, “buy one, get one free” sounds better to most folks than “two items at 50% off,” and they’ll often be convinced to buy by the first phrase.

10. Removing the Dollar Sign

Prices with dollar signs can make you feel a bit of fear or anxiety that comes with having to spend money — especially if it’s money you don’t have. Retailers often know this, so sometimes they will remove or reduce the size of the dollar sign to nudge you towards shelling out some bucks.

11. Bundling

This pricing tactic involves grouping a couple of items that go together and offering a slightly discounted price. For instance, you might see a men’s grooming kit that ends up being 25% less expensive than bought separately.

This strategy makes you feel as if you’re saving money, when in fact, you’re spending more than you need to — especially if you really only need one of the products included in the bundle. You may wind up walking out of the store with more than you intended to buy vs. using your credit card responsibly.

Recommended: 10 Signs You’re Living Beyond Your Means

12. Limits Per Customer

When limits are placed as to how much you can buy of a certain item, it tricks you into believing that the product is scarce and you’d better hurry and buy it. Or it might lead you to think the price is so low that the retailer can only offer so many at that price before they start losing money. Because of this, you might buy up to the limit so you don’t forgo a great bargain.

However, you have no proof that any of these assumptions are correct. It could just be clever marketing at work.

13. Showing the Real Price Next to the Sale Price

Also known as anchoring, this process involves showing the retail price next to a sale price to make it seem like a real bargain. For instance, seeing the sale price of $14.99 next to the full price of $19.99 can make you feel as if you are saving big (or perhaps bigger than you actually are).

By “anchoring” your decision based on the full price, the sale price will appear to be a great deal. You often see this tactic at discount grocery stores and off-price department retailers.

14. Showing the Daily Equivalence

You’ve probably come across this tactic. A company will break down the cost of a product or service per day, which makes the cost seem negligible. For instance, a $60 a month cloud storage service breaks down to $2 a day. Or a $15 a monthly streaming services subscription equates to a mere 50 cents a day.

By highlighting these daily costs, it can seem like you’re spending very little each day on a product or service. This might convince you to throw down some cash…and then regret making a bad financial decision.

15. Using Fake Reviews or User Generated Content

While there are obviously some ethical questions around this, using fake reviews can create the appearance that a product or service is getting a lot of buzz. And if something is popular, you might be enticed to jump on the bandwagon and see what everyone is talking about. It could make you buy something you don’t need, that’s overpriced, or that’s lower quality.

An influencer making a plug on a social media platform, along with viewer comments also raving about something, can also make an item seem valuable. Or some companies may reward customers with discounts if they share how great an item is. It gives you the impression that you must buy or will experience FOMO (fear of missing out), which can in turn lead to FOMO spending.

It’s wise to ask questions before making an impulse buy in this situation and to do your own research on trusted sites to evaluate products.

Can You Do Anything About Psychological Pricing Tricks?

While psychological pricing tricks are pervasive and can certainly dupe you into spending more, there are ways you can avert them:

•   Try the 30 day rule. What is the 30 day rule? If you see a pricey item you are tempted to buy but hadn’t budgeted for, make a note in your calendar for 30 days later. Write down what it is, its price, and where you saw it . Then wait 30 days. Chances are, the initial urge to purchase the items will have fizzled. If not, then you can feel reassured that it’s something you truly want and budget for it.

•   Consider the personal value of an item. Instead of fixating on the price tag of something, consider the value it would bring to your life. Is it something you would get a lot of joy from? Or something you could really use? Let that guide you vs. buying an item because it seems like a bargain or everyone else has it.

•   Figure out the number of uses of an item. If you plan on wearing a pair of jeans at least 30 times and they cost $90, that’s $3 per use. Is that something you can afford and would enjoy having? Then it might be worthwhile. But if it’s a $20 item and chances are it will most likely get shoved into the closet and ignored, that might end up being a waste of money.

•   Stick to a weekly budget. It’s no fun having to get your finances back on track after blowing your budget. Avoid that by keeping a weekly number in mind for your discretionary spending — think clothing, entertainment, eating out, hobby-related spending, and sundry items (vanilla lattes, a new conditioner, etc.). This can help you stay within your means. It could be helpful to have a separate bank account where you park your discretionary funds. It’s far easier to see exactly where your money is going that way.

The Takeaway

Psychological pricing tricks can certainly sway you to dole out more cash. That being said, if you are aware of them, you can use good judgment about these marketing tactics. That, in turn, can allow you to stay within your means, make the best financial decisions for your situation, and stay in control of your cash.

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall. Enjoy up to 4.60% APY on SoFi Checking and Savings.

FAQ

Is psychological pricing illegal?

Psychological pricing typically isn’t illegal, though in some cases, the tactic could veer into some other murky territory that might not be legal. But for the most part, these pricing tricks are acceptable ways of getting consumers to believe they are getting a deal or that an item is in high demand.

Is psychological pricing immoral?

There are some instances where pricing tricks border on unethical territory. For instance, using fake reviews to make a product seem more popular than it really is and to generate hype is considered unethical.

Why is psychological pricing effective?

Psychological pricing is effective because it relies on your brain making snap judgments in spending situations. These tactics can steer you toward choosing a particular product or buying more that you may truly need.

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Interest rates are variable and subject to change at any time. These rates are current as of 10/24/2023. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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A credit card can serve as a fantastic financial tool and offer a number of perks, from the opportunity to build your credit to the chance to rake in lucrative rewards. However, using a credit card responsibly is key to reaping those benefits. Otherwise, a credit card is more likely to harm your financial well-being than help it.

Using a credit card responsibly involves sticking to basic rules like making on-time payments and avoiding practices such as spending more with your card than you can afford to pay off. By learning some tips for how to use a credit card responsibly, you’ll be well on your way toward making the most out of this financial tool.

How Do Credit Cards Work?

A credit card is a payment card that offers access to a revolving line of credit. You can tap into this credit line for a variety of purposes, including making purchases, completing balance transfers, and taking out a cash advance. Cardholders can borrow up to their credit limit, which is largely determined based on their creditworthiness and represents the maximum amount they can borrow.

It’s necessary to make at least a minimum payment by the due date each month in order to avoid a late fee. However, to avoid paying interest entirely, cardholders must pay off their balance in full each month; interest accrues on any balance that rolls over from month to month.

Many credit card companies charge compounding interest, which means that not only will you owe interest on any outstanding balance, you’ll also end up paying interest on the interest. That’s because this interest is calculated continually, then added to your balance, and it may be compounded daily. You may be shocked to see how much credit card interest you’ll pay if you only make the minimum payment each month.

Understanding Your Statement

A crucial component of knowing how credit cards work is understanding your monthly credit card statement. Your statement contains a number of important pieces of information about your credit card account, including:

•   Your account information

•   Your account summary, including your payment due date

•   All purchases made with the card

•   Your total credit card balance

•   The minimum payment due

•   When the credit card payment is due

•   Your available credit

•   Interest charges

•   Rewards summary

Many of these details are key to know in order to ensure you’re using a credit card wisely. For instance, knowing your payment due date will ensure you make your payment on time, avoiding any late fees and a ding to your credit score.

Checking on your available credit can help you ensure you’re not using too much of your credit, which can drive up your credit utilization rate and subsequently drag down your score.

10 Tips For Using a Credit Card Responsibly

To make the most of your credit card, here are several credit card rules to keep in mind — as well as some guidance on what credit card behavior to avoid.

1. Avoid Making Too Many Impulse Purchases

To use a credit card responsibly, you want to avoid overspending with it. How many is “too many” purchases depends upon how much your impulse buys cost and how easily they fit into your budget. If you know you can pay off your credit card balances and otherwise meet your monthly expenses and savings and other financial goals, then that’s an entirely different situation from one in which your impulse purchases are too costly to promptly pay off and/or prevent you from meeting other financial responsibilities or goals.

If you enjoy making spontaneous buys, you may consider including this as a line item in your monthly budget and then sticking to it. This could add enjoyment to your life without causing financial problems down the road.

2. Use the Right Credit Card

There are a variety of different types of credit cards, and depending on how you plan to use your credit card, one option may make more sense than another. Some credit cards are there to help you build your credit, while others pay out generous rewards.

Selecting which card is right for you requires a look at your financial habits and current situation. For example, if you know that you often end up needing to carry a balance, then it may make sense to find a card that prioritizes low interest rates. Or, let’s say you’re a frequent vacationer — in that case, you might benefit from a travel rewards card.

3. Take Advantage of Benefits Offered

Interested in another way to use your credit card responsibly? Signing up for eligible rewards programs can help cardholders make the most of their card. Each type of credit card may have slightly different reward programs. See what the full range perks offered by your card are — and if you’re not sure, check the card’s website or ask the credit card company for specifics. For example, you might need help understanding what unlimited cash back really means in terms of how you might benefit.

Once you know what perks are available, you can use them strategically. You may discover that the card(s) you have don’t provide the best benefits for you. For example, maybe your card offers one of its highest rewards rates for gas purchases, but you don’t do much driving. In that case, you might be better served by a rewards card that offers a flat rewards rate or that prioritizes a category in which you’re a frequent spender.

Finally, if you’re earning rewards points, it’s also important to consider the best way to use them. Sometimes it’s possible to get a bigger bang for your buck if, say, you use your rewards points at an approved store rather than opting for cash back.

4. Sign Up for Automatic Payments

To avoid missing payments or making them late, consider signing up for automatic payments or autopay. By enrolling in autopay, you’ll regularly have money transferred from a linked account each month in order to cover the amount due (or at least the minimum payment required).

Another option is to sign up for automatic reminders about payment due dates (by text, for example, or by email). You can do this through the credit card company or via a calendar app.

What’s most important is coming up with a plan that works best for you to ensure you make your payments on time. Otherwise, you could face late fees and adverse effects to your credit score.

Recommended: Does Applying For a Credit Card Hurt Your Credit Score

5. Regularly Check Your Statements

Mistakes do happen on credit card statements and, unfortunately, fraudulent activities could impact your account. Check your statement every month to ensure that you made all the charges that appear, and that any payments you’ve made are accurately reflected.

If something is missing, review the statement dates to see if the transaction may have happened right after the statement cut-off date, for instance. If something seems off, contact your credit card company for clarification. In the case of any potentially fraudulent activity, it’s important to report credit card fraud to your credit card company immediately.

6. Pay More Than the Minimum

You’ve just read about how credit card interest works, so you’ll remember that only making the minimum payment doesn’t get you out of paying interest. To avoid credit card interest charges, you’ll need to pay off your monthly statement balance in full.

Understandably, this isn’t always possible, but even then, it still helps to pay as much above the minimum as you can afford to. This will at least cut down on the outstanding balance that accrues interest.

7. Don’t Close Out Old Cards

While it might seem logical to close out an older credit card you’re no longer using, you’ll want to think twice before you cancel a credit card. That’s because doing so can have adverse implications for your credit.

For starters, canceling a credit card will lower your credit utilization rate, which compares your total outstanding balance to your overall available credit limit. Closing out a card will cause you to lose that card’s credit limit, thus lowering the amount of credit you have available.

Closing an old card could also have an impact if the card in question is one of your older accounts. Another factor that contributes to your credit score is the age of your credit. By closing out an old account, you’ll lose that boost in age.

That being said, there are scenarios where it might make sense to close a card, such as if it charges a high annual fee. Just be mindful of the potential effects it will have on your credit before moving forward.

💡 Quick Tip: Aim to keep your credit utilization — the percentage of your total available credit that you’re using at any given time — below 30% (or lower). This could help you to maintain a strong credit score.

8. Maintain a Low Credit Utilization Rate

Another key tip for responsible credit card usage is to avoid maxing out your cards. Instead, aim to keep a lower credit utilization rate — ideally below 30%. The lower you can keep this utilization rate, the better it is for your credit score.

9. Avoid Unnecessary Fees

Another part of using a credit card responsibly is being aware of all of the fees you could face, and then taking steps to steer clear of those costs. Your credit card terms and conditions will spell out all of the fees associated with your card, as well as the card’s APR (or annual percentage rate) and the rules of its rewards program.

Many credit card fees are pretty easy to avoid. For instance, if you’ll incur a fee to send money with a credit card, simply avoid doing that and look for an alternative route. Similarly, you can avoid late payment fees by making on-time payments, and over-the-limit fees by not maxing out your credit card.

10. Avoid Applying for Too Many Cards

As you get into the swing of things with using your credit card, you may feel tempted to keep acquiring new cards, whether to keep on earning rewards or to capitalize on enticing welcome bonuses. But proceed with caution when it comes to applying for credit cards.

Applying for credit cards too frequently can raise a red flag for lenders, as it may suggest that you’re overextending yourself and desperate for funding. Plus, each time you submit an application for a credit card, this will trigger a hard inquiry, which can ding your credit score temporarily. Consider waiting at least six months between credit card applications.

The Takeaway

When used responsibly, credit cards can be helpful for a whole slew of things, from making online purchases to building your credit. The key phrase to keep in mind is “when used responsibly.” To stay on top of your credit cards, tips like signing up for automatic payments, making the most of the rewards programming, and using the right type of credit card for your needs are all important.

Whether you're looking to build credit, apply for a new credit card, or save money with the cards you have, it's important to understand the options that are best for you. Learn more about credit cards by exploring this credit card guide.

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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

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Emerging markets or emerging market economies (EMEs) are in the process of achieving the building blocks of developed nations: they’re establishing regulatory bodies, creating infrastructure, fostering political stability, and supporting mature financial markets. But many emerging markets still face challenges that developed market countries have overcome, and that contributes to potential instability.

To further answer the question, “What are emerging markets?”, it helps to understand developed markets.

Developed economies have higher standards of living and per-capita income, strong infrastructure, stable political systems, and mature capital markets. The U.S., Europe, U.K, and Japan are among the biggest developed nations.

Because these economies wield so much power globally, many investors don’t realize that, in truth, emerging markets make up the majority of the global economy.

India, China, and Brazil are a few of the larger countries that fall into the emerging markets category. Some emerging market economies, like these three, are also key global players — and investors may benefit by understanding the opportunities emerging markets present.

What is an Emerging Market?

In essence, an emerging market refers to an economy that can become a developed, advanced economy soon. And because an emerging market may be a rapidly growing one, it may offer investment potential in certain sectors.

Internationally focused investors tend to see these countries as potential sources of growth because their economies can resemble an established yet still-young startup company. The infrastructure and blueprint for success have been laid out, but things need to evolve before the economy can truly take off and ultimately mature. At the same time, owing to the challenges emerging market economies often face, there are also potential risks when investing in emerging markets.

Investors might bear the brunt of political turmoil, local infrastructure hurdles, a volatile home currency and illiquid capital markets (if certain enterprises are state-run or otherwise privately held, for example).


💡 Quick Tip: Investment fees are assessed in different ways, including trading costs, account management fees, and possibly broker commissions. When you set up an investment account, be sure to get the exact breakdown of your “all-in costs” so you know what you’re paying.

Emerging Market Examples

What constitutes an emerging market economy is somewhat fluid, and the list can vary depending on the source. Morgan Stanley Capital International (MSCI) classifies 24 countries as emerging; Dow Jones also classifies 24 as emerging. There is some overlap between lists, and some countries may be added or removed as their status changes. Greece, for example, is no longer considered a developed market but an emerging one.

India is one of the world’s biggest emerging economies. Increasingly, though, some investors see India as pushing the bounds of its emerging market status.

China

China is the second-largest economy globally by gross domestic product (GDP). It has a large manufacturing base, plenty of technological innovation, and the largest population of any country in the world.

Yet China still has a few characteristics typical of an emerging market. For example, the gross national income per capita falls below the threshold established by the World Bank for a developed country: about $12,600 per year versus the higher standard of above $13,200 per year. With its Communist-led political system, China has embraced many aspects of capitalism in its economy but investors may experience some turbulence related to government laws and policy changes. The Renminbi, China’s official currency, has a history of volatility. And finally, post-Covid, China’s economy has lagged.

India

India is another big global economy, and it’s considered among the top 10 richest countries in the world, yet India still has a low per-capita income that is typical of an emerging market and poverty is widespread.

At the same time, India was ranked as being among the more advanced emerging markets, thanks to its robust financial system, growing foreign investment, and strong industrials, especially in telecommunication and technology.

Characteristics of an Emerging Market Economy

As noted above, there isn’t a single definition of an emerging market, but there are some markers that distinguish these economies from developed nations.

Fast-Paced Growth

An emerging market economy is often in a state of rapid expansion. There is perhaps no better time to be invested in the growth of a country than when it enters this phase.

At this point, an emerging market has laid much of the groundwork necessary for becoming a developed nation. Capital markets and regulatory bodies have been established, personal incomes are rising, innovation is flourishing, and GDP is climbing.

Lower Per-Capita Income

The World Bank keeps a record of the gross national income (GNI) of many countries. For the fiscal year of 2022, lower-middle-income economies are defined as having GNI per capita of between $1,136 and $4,465 per year. At the same time, upper-middle-income economies are defined as having GNI per capita between $4,466 and $13,845. (By way of contrast, the U.S. is considered a high-income economy, with a GNI of $76,370.)

The vast majority of countries that are considered emerging markets fall into the lower-middle and upper-middle-income ranges. For example, India, Pakistan, and the Philippines are lower-middle-income, while China, Brazil, and Mexico are upper-middle-income. Thus, all these countries are referred to as emerging markets despite the considerable differences in their economic progression.

Political and Economic Instability

For most EMEs, volatility is par for the course. Risk and volatility tend to go hand in hand, and both are common among emerging market investments.

Emerging economies can be rife with internal conflicts, political turmoil, and economic upheaval. Some of these countries might see revolutions, political coups, or become targets of sanctions by more powerful developed nations.

Any one of these factors can have an immediate impact on financial markets and the performance of various sectors. Investors need to know the lay of the land when considering which EMEs to invest in.

Infrastructure and Climate

While some EMEs have well-developed infrastructure, many are a mix of sophisticated cities and rural regions that lack technology, services and basic amenities like reliable transportation. This lack of infrastructure can leave emerging markets especially vulnerable to any kind of crisis, whether political or from a natural disaster.

For example, if a country relies on agricultural exports for a significant portion of its trade, a tsunami, hurricane, or earthquake could derail related commerce.

On the other hand, climate challenges may also present investment opportunities that are worth considering.

Recommended: 27 Potential Ways to Invest in a Carbon-free Future

Currency Crises

The value of a country’s currency is an important factor to keep in mind when investing in emerging markets.

Sometimes it can look like stock prices are soaring, but that might not be the case if the currency is declining.

If a stock goes up by 50% in a month, but the national currency declines by 90% during the same period, investors could see a net loss, although they might not recognize it as such until converting gains to their own native currency.

Heavy Reliance on Exports

Emerging market economies tend to rely heavily on exports. That means their economies depend in large part on selling goods and services to other countries.

A developed nation might house all the needs of production within its own shores while also being home to a population with the income necessary to purchase those goods and services. Developing countries, however, must export the bulk of what they create.

Emerging Economies’ Impact on Local Politics vs. Global Economy

Emerging economies play a significant role in the growth of the global economy, accounting for about 50% of the world’s economic growth. Moreover, it’s predicted that by 2050 three countries will have the biggest economies: the U.S., China, and India, with only one currently being a developed economy.

But, while emerging markets help fuel global growth, some of those with higher growth opportunities also come with turbulent political situations.

As an investor, the political climate of emerging market investments can pose serious risks. Although there is potential for higher returns, especially in EMEs that are in a growth phase, investors need to consider the potential downside. For example, Thailand and South Korea are emerging economies with high growth potential, but there is also a lot of political unrest in these regions.


💡 Quick Tip: Are self directed brokerage accounts cost efficient? They can be, because they offer the convenience of being able to buy stocks online without using a traditional full-service broker (and the typical broker fees).

Pros and Cons of Investing in Emerging Markets

Let’s recap some of the pros and cons associated with EME investments.

Pros

•  High-profit potential: Selecting the right investments in EMEs at the right time may result in returns that might be greater than most other investments. Rapidly growing economies could provide ample opportunity for profits. But as noted above, it’s impossible to guarantee the timing of any investment.

•  Global diversification: Investing in EMEs provides a chance to hold assets that go beyond the borders of an investor’s home country. So even if an unforeseen event should happen that contributes to slower domestic growth, it’s possible that investments elsewhere could perform well and provide some balance.

Cons

•  High volatility: As a general rule, investments with higher liquidity and market capitalization tend to be less volatile because it takes significant capital inflows or outflows to move their prices.

EMEs tend to have smaller capital markets combined with ongoing challenges, making them vulnerable to volatility.

•  High risk: With high volatility and uncertainty comes higher risk. What’s more, that risk can’t always be quantified. A situation might be even more unpredictable than it seems if factors coincide (e.g. a drought plus political instability).

All investments carry risk, but EMEs bring with them a host of fresh variables that can twist and turn in unexpected ways.

•  Low accessibility: While liquid capital markets are a characteristic of emerging markets, that liquidity still doesn’t match up to that of developed economies.

It may be necessary to consult with an investment advisor or pursue other means of deploying capital that may be undesirable to some investors.

Why Invest in Emerging Markets?

Emerging markets are generally thought of as high-risk, high-reward investments.

They are also yet another way to diversify an investment portfolio. Having all of your portfolio invested in the assets of a single country puts you at the mercy of that country’s circumstances. If something goes wrong, like social unrest, a currency crisis, or widespread natural disasters, that might impact your investments.

Being invested in multiple countries can help mitigate the risk of something unexpected happening to any single economy.

The returns from emerging markets might also exceed those found elsewhere. If investors can capitalize on the high rate of growth in an emerging market at the right time and avoid any of the potential mishaps, they could stand to profit. Of course timing any market, let alone a more complex and potentially volatile emerging market, may not be a winning strategy.

Recommended: Pros & Cons of Global Investments

The Takeaway

While developed nations like the U.S. and Europe and Japan regularly make headlines as global powerhouses, emerging market countries actually make up the majority of the world’s economy — and possibly, some very exciting opportunities for investors.

China and India are two of the biggest emerging markets, and not because of their vast populations. They both have maturing financial markets and strong industrial sectors and a great deal of foreign investment. And like other emerging markets, these countries have seen rapid growth in certain sectors (e.g. technology).

Despite their economic stature, though, both countries still face challenges common to many emerging economies, including political turbulence, currency fluctuations and low per-capita income.

It’s factors like these that can contribute to the risks of investing in emerging markets. And yet, emerging markets may also present unique investment opportunities owing to the fact that they are growing rapidly.

Emerging market exchange-traded funds (ETFs) might invest in different assets within a single country or spread their investments throughout multiple countries. Bonds can also play a role in an emerging market portfolio. Many countries with developing economies have used the issuance of new debt to borrow money to build out their infrastructure. That means some emerging economies could offer bonds with attractive yields. But investors need to carefully weigh the potential risks.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

Invest with as little as $5 with a SoFi Active Investing account.

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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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